possible effects of government on businesses

Explore and explain the possible effects of government on businesses, take the financial situations individually, and explain and analyse the possible effects on the business situation:

1) The government makes a substantial rise in interest rates
2) The government makes a substantial rise in income tax on all levels

A) business situation : a large retailer of electrical goods like TVs and Comuters, like DIXONS or CURRYS

Solution Preview

What would happen to a large retailer of electrical goods if interest rates took a big hike? First of all, why would a central bank consider raising interest rates? What does an increase in interest rates do? Generally, when interest rates are up the cost of borrowing money is more expensive, right? I mean, after all, that's what an "interest" rate is. It's the cost of borrowing money. When interest rates are high, money is expensive. When interest rates are low, money is cheap. That means that the cost of borrowing the money is low.

Now, let's consider what high interest rates do to people in debt. Since the interest rate has gone up, the cost of their borrowing (and hence, the cost of their loan/debt) goes up. Therefore, for those in debt, finances get worse. They have to pay more to the loaning agency to keep the loan.

However, what about the effect of high interest rates on someone who has lots of money and doesn't need to borrow. Well, he can loan his money, right? That's another way of saying that he can invest it. Therefore, when interest rates are high, investments become attractive because there is a higher rate of return on the investment.

High interest rates usually attracts foreigner investors. It's a way to entice investors to dump their money in that country. ...